Definition
Substitutes and complements are economics ideas that describe how the prices and demand of two goods affect each other. When you can use one in place of the other, so they compete, they are called substitutes. When using them together makes you more satisfied, like a perfect pair, they are called complements.
Substitutes: I'll Take That One Instead
Say the price of jjamppong (a spicy seafood noodle soup) suddenly jumps at lunchtime. We naturally start thinking, 'Maybe I'll have jajangmyeon (black bean noodles) today instead?' When you can use one product in place of another and get a similar level of satisfaction, that relationship is called substitutes (goods that can stand in for each other).
Between substitutes, when the price of one goes up, the other suddenly gets popular. When jjamppong gets pricier, people eat less of it and look for the relatively cheaper jajangmyeon. So in the end, when the price of one goes up, demand for the other goes up.
When chicken prices spike and pork sales rise along with them, or when cola gets pricier and lemon-lime soda sales jump, those are classic examples of substitutes too. The two products are strong rivals, stealing each other's customers in the market.
Complements: We Always Go Together
When you get a new smartphone, you naturally put a matching screen protector and a charging cable in your cart too. When two items give you much more utility (satisfaction) used together as a pair than used separately, that relationship is called complements (goods that make up for each other).
Complements are the opposite of substitutes. They share each other's fate. If smartphones get too expensive and people buy fewer of them, there are fewer devices to put a screen protector on, so demand for the other item falls too.
Coffee and syrup, bread and butter, tennis rackets and tennis balls: whenever a drop in buying one hits the other too, these tightly bound pairs are all complements.
A Little More Precisely
To put it a little more precisely, economics tells substitutes from complements with a number called 'cross elasticity of demand.' It measures how many percent the demand for one product swings when the price of another product changes by 1%.
If the price of A goes up, demand for B goes up too, and the reaction number comes out positive (+), the two are classified as substitutes. If demand for B falls and the number comes out negative (-), they are seen as complements. And if the number is close to 0, the two products don't affect each other, and they stay in an independent-goods relationship.
These relationships are not fixed. For one person, coffee and green tea may be perfect substitutes. For another, they may be completely different drinks. With advances in technology and changes in consumer taste, how well products pair up can change at any time.
Common misconceptions
The substitute and complement relationship applies the same way to everyone, all the time.
It depends on personal taste and spending habits. Some people see rice and bread as perfect substitutes. But for someone who must have rice, bread is just a snack and can't replace it.
Where you meet it
When the price of beef rises sharply, more consumers look for pork belly. (substitutes)
When a printer is sold at a big discount, sales of its matching ink cartridges rise along with it. (complements)
In one sentence
Substitutes are rivals you use instead of each other, so when one's price goes up, demand for the other rises. Complements are partners you use together, so when one's price goes up, demand for the other falls too.